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WGC: 1Q Global Gold Demand Contracts Due To ETF Outflows; Jewelry Rises

By Allen Sykora of Kitco News
Thursday May 16, 2013 1:00 AM

(Kitco News) - Large outflows from gold exchange-traded funds led to a 13% year-on-year decline in global gold demand during the first quarter to 963 metric tons, the World Gold Council said Thursday.

However, most of the other major forms of demand – such as jewelry, bars and coins – increased, the WGC said in its quarterly report on demand trends. Gold buying in the two key markets of India and China both grew by more than 20% and central-bank demand remained above 100 metric tons for the seventh straight quarter.

“Despite the retrenchment in the gold price during the quarter, there was a dramatic increase in demand for jewelry, bars and coins,” said Jason Toussaint, chief executive officer of World Gold Trust Services, a subsidiary of the WGC and sponsor of the SPDR Gold Trust. “That is a testament to the fact that demand for the physical asset is robust.”

Data for the report was compiled independently by the consultancy Thomson Reuters GFMS. In value terms, total gold demand in the first quarter was $50.5 billion, down 16% from the year before.

Total investment demand was 200.8 metric tons in the first quarter, down 49% from the same period a year ago, the WGC said. “The year-on-year decline in investment was solely attributable to the net outflows from the ETFs, which obscured the strong rise in investment for gold bars and coins at the retail level,” the WGC said.

Outflows from ETFs and similar products were listed at 176.9 tons. Otherwise, total bar and coin demand rose 10% to 377.7 tons.

The differing behavior of investors during the quarter was reflective of the sometimes conflicting drivers of demand in the two market segments, the WGC said.

Investors at the retail level stepped up purchases of bars and coins as the price fell back from the fourth quarter. “The fundamental reasons for holding gold among this community are unchanged over time; they value gold for its role in preserving wealth and hedging against inflation over the long term,” said the WGC.

Meanwhile, institutional investors tend to hold gold for a shorter-term more speculative approach, the WGC said. Thus, there was selling of ETF holdings on the price decline. “This reaction may have been driven by several factors: profit-taking on long-held positions, loss limitation on more recently initiated positions, a switch to other investment channels, etc.,” the WGC said. The report listed an average first-quarter price of $1,632 an ounce that was down 5% from the fourth quarter.

In particular, there was a “rebalancing” in which some investors moved into equities, Toussaint explained. Some of the U.S. stock indexes have hit record highs.

“We’ve seen not necessarily a change in opinion in terms of the strategic case of gold from the investor community, but perhaps those who had overweight positions in gold are reducing those to neutral weighting or slight underweight, and then moving those assets into U.S. and global equities,” Toussaint said. “The strategic case for gold remains as strong now as it has for the last decade, considering the state of the global economy….The global crisis is far from over. We see continued quantitative easing and essentially a continued race to the bottom in terms of currency devaluation prophesies around the world.”

Still, the WGC said, the ETF outflows represented just 7% of total gold ETF holdings over the period. Further, total gold ETF holdings are estimated to account for just 1% of the entire 175,000-ton above-ground stock of gold, the WGC said.

Also, the WGC said, positive over-the-counter investment and stock flows of 120 tons soaked up some of the ETF outflows. The WGC said some investors apparently shifted their positions into allocated metal accounts and demand also reflected bargain hunting among investors.

In China, investment demand rose 22% to a quarterly record of 109.5 tons, the report said. Indian investment rose 52% year-on-year to 97 tons. U.S. demand for bars and coins was up 43% to 20.1 tons.

Total Chinese demand, including jewelry, climbed 20% year-on-year to 294.3 tons, the report said. All sources of Indian demand were up 27% to 256.5 tons.

Jewelry Demand Boosted By China, India, U.S.

Global gold jewelry demand rose 12% to 551 metric tons. In value terms, it hit a record high of $28.9 billion, a year-on-year gain of 8%, the WGC said. India and China accounted for a combined 62% of first-quarter jewelry demand. Also, U.S. quarterly demand rose year-on-year for the first time in seven years.

“India and China for some time now have been the two growth engines driving the gold market,” Toussaint said. While estimates of China’s rate of economic growth have been trimmed to around 7.7%, the Chinese economy remains “a dramatic growth story,” Toussaint said.

“So there is literally a tidal wave of discretionary wealth being created in India and China,” Toussaint said. Further, there is a cultural affinity for gold in both.

He pointed out that there is a different approach to buying gold in these markets than in most Western nations. In China and India, gold jewelry is often bought as an investment although one that can also be worn. “In Western markets, it’s more of a discretionary luxury item.”

Chinese jewelry demand, which is typically strong in the first quarter due to the Chinese New Year, rose 19% to hit a record high of 184.8 tons. The WGC cited renewed economic confidence in the country and less uncertainty following the transfer of Chinese leadership late in 2012.

Indian demand rose 15% to 159.5 tons. This was boosted by a good spring harvest that meant improved incomes for rural Indians, a dip in local gold prices during February as the rupee firmed, plus buying ahead of the second-quarter wedding season, the WGC said.

“Although India and China were again the standout performers, jewelry demand improved appreciably in many other markets, most notably the U.S.,” said the WGC report.

In fact, U.S. jewelry demand rose year-on-year for the first time since the third quarter of 2005, the WGC said. This rose 6% to 18.8 tons. This was helped by improved sentiment about the economy and more willingness to spend money on discretionary items such as gold jewelry, Toussaint said.

The WGC report covers the January-March quarter, and there have been numerous anecdotal reports of a wave of bargain hunting that was unleashed after this following the sharp sell-off in prices that occurred on April 12 and 15.

“When the dust settles and we come out with our second-quarter 2013 report, I think you’ll see a continued surge in demand for jewelry, bars and coins,” Toussaint said. There already have been reports of rising imports into China and India so far in the second quarter, he pointed out, with reports of strong demand elsewhere around the world as well.

“The price drop in April, fueled by non-physical moves in the market, proved to be the catalyst for a surge of buying that has left many retailers short of stock and refineries introducing waiting lists for deliveries,” said Marcus Grubb, managing director of investment at the World Gold Council. “Putting this into context, sales of bars and coins, jewelry and consumption in the technology sector still make up 81% of the market.”

Central-Bank Selling Dips But Holds Above 100 Tons

Central banks bought 109.2 tons of gold in the first quarter, down slightly from 115.2 in the first quarter of 2012, the WGC said. Central banks were net purchasers for the ninth straight quarter, with the quarterly total within the broad range of 70 to 160 tons per quarter over the last two years, the WGC said.

“The steady level of buying confirmed that central banks and institutions continue to favor gold’s diversification benefits as they reduce their portfolio allocations to U.S. dollars and (the) euro,” the report said. Buyers included Russia, Ukraine, Kazakhstan, South Korea, Azerbaijan and Indonesia.

Gold sales by signatory European countries under the Central Bank Gold Agreement were “non-existent” during the quarter, the WGC said.

Meanwhile, demand for gold in the technology sector declined 4% year-on-year to 102 tons. “The sector was again hindered by weak consumer sentiment as the lack of recovery in Europe dampened consumer spending on new electrical and electronic products,” the WGC said. Electronics consumption fell 3% to 71.6 tons.

By Allen Sykora of Kitco News asykora@kitco.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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